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The Legality Of Bitcoin: Is Bitcoin Against the Law?

by CryptoWordTalk
The Legality Of Bitcoin Is Bitcoin Against the Law

A single institution — in most instances, a central bank-creates, releases, and controls all fiat currencies on the globe. Ordinary people are only permitted to purchase, sell, or retain money under the legislation. If someone attempts to make any amount of money, they will almost certainly end up in prison.

When Bitcoin was first launched, it ushered in an entirely new and distinct paradigm. The world’s first digital, decentralized money with no central authority. Furthermore, the Bitcoin idea suggests that anybody with sufficient computer power may generate coins just by participating in the community.

Law enforcement agencies, tax officials, and legal regulators all around the globe are attempting to get their minds around the idea of cryptocurrencies and where they fit into current laws and legal frameworks as they become more popular.

Bitcoin’s legality is contingent on who you are, where you are on the globe, and what you want to do with it. Here’s our guide to Bitcoin legal problems, which focuses mostly on the United States but also includes other important countries.

Cryptocurrencies Are Causing Concern

Authorities in many countries are still trying to comprehend Bitcoin, let alone classify it legally. Its decentralized nature has sparked a lot of worry. It’s only reasonable for governments to be concerned about a financial system that is difficult to regulate.

This includes currency transactions as well as the safeguarding of people’s assets. While US-based exchanges are required to be regulated, many offshore platforms are not. Indeed, there has been a long history of bitcoin exchanges abruptly closing down and disappearing with people’s money.

Most well-known is the closing of Mt.Gox, the notorious exchange. Due to technical issues and the alleged theft or loss of 744,000 of its customers’ Bitcoins, the previously most famous Bitcoin exchange in existence filed for bankruptcy at the beginning of 2014. This amounted to approximately 6% of the total 12.4 million Bitcoins in circulation at the time.

Another reason for worry is Bitcoin’s potential to be used semi-anonymously. Despite the fact that every transaction is recorded on the Blockchain, users may remain nearly entirely anonymous since the records only include the public keys and the amount of cash moved.

The majority of these concerns were expressed when the dark web market Silk Road received mainstream media attention, since Bitcoins were the sole method of payment allowed. The FBI has already shut down the market, but officials are still concerned about Bitcoin’s allure among illicit products and services dealers. According to some, Bitcoin’s semi-anonymity and decentralized structure could be used to launder money and evade taxes.

The Role Determines Your Opportunities

Buying goods

The US Treasury Department’s Financial Crimes Enforcement Network categorized Bitcoin as a convertible decentralized virtual money in 2013. (FinCEN). They’ve also provided advice, stating that people who acquire virtual currency units and utilize them to buy products are not considered money transmitters and are functioning legally.

As a result, purchasing good-natured products and services with Bitcoins is perfectly lawful. Several large and small online marketplaces and service providers, including Overstock, Shopify, and OKCupid, accept cryptocurrency as a method of payment. Furthermore, Bitcoins may be used to pay for goods and services at stores and restaurants throughout the United States.

Investing

Investing in Bitcoin, according to the same advice, is also lawful. Anti-Money Laundering and Know Your Customer rules must be followed by several regulated US-based exchanges. As a result, anybody who wants to trade or invest in Bitcoin must first authenticate their identity and link it to an existing bank account.

The US Securities and Exchange Commission (SEC) has cautioned prospective investors that Bitcoin users may be targeted by both fraudsters and marketers of high-risk investment schemes.

Mining

Users who create Bitcoin units and exchange them for fiat cash may be considered money transmitters, according to FinCEN guidelines, and may be subject to specific rules and regulations governing that kind of conduct.

However, the rules aimed at punishing Bitcoin miners have seldom, if ever, been implemented.

Accepting Bitcoin Payments (for Business)

Accepting Bitcoin payments is allowed for both large and small companies. Of course, this assumes that it’s a good-natured company that offers products and services in normal money and also accepts Bitcoin as a legitimate form of payment. Any company that accepts Bitcoin payments must also pay taxes on the money they receive in Bitcoin.

Taking Bitcoin as a method of payment is the same as accepting cash, gold, or gift cards since it has been designated as a convertible virtual currency.

Taxation

According to the Internal Revenue Service’s (IRS) Virtual Money Guidance, cryptocurrencies such as Bitcoin should be regarded as property rather than currency, and should be taxed as such. It isn’t, however, as straightforward as it may seem.

For example, if you use your Bitcoins to purchase something worth $300, you have just sold an asset. Depending on the value of Bitcoin when you purchased it and when you sold it, you either earned a profit or a loss on that transaction. The conditions determine whether the gain is ordinary or capital, and whether it is short or long-term.

The rule isn’t completely clear, but the IRS is attempting to enforce it. Only 802 individuals paid taxes on their Bitcoin earnings in 2015. The IRS seems to be employing proprietary technologies to hunt down Bitcoin tax evaders.

In the House of Representatives, a bipartisan measure calling for a tax exemption for transactions under $600 was recently presented. If it passes, it will greatly simplify the lives of tiny, day-to-day traders. Until then, it’s a good idea to keep track of any Bitcoin-related transactions.

When it comes to Bitcoin trading, records must include the same data as stock or FX brokerage statements: date, description, amount, price, and fees. If you’re mining Bitcoin, you’ll want to know when the Bitcoin profits are reached. Businesses that take Bitcoin as a method of payment must keep track of the sales reference, the amount received in BTC, and the transaction date. If sales taxes are required, the amount owed is determined using the average exchange rate at the time of purchase.

BitLicense

BitLicense refers to a set of rules designed for Bitcoin businesses in New York. It is offered by the New York State Department of Financial Services. Only five licenses have been issued as of September 2017, two years after the law went into force, and the businesses who were able to acquire them had to pay upwards of $100,000 to do so. Many businesses have chosen to stop servicing New York citizens, with Bitfinex characterizing the NYDFS regulations as “extremely invasive” and stating that they will jeopardize the privacy of their user base.

The license is acquired via an application procedure that costs $5,000. Companies who want to get the license will need to hire a compliance officer who will monitor the company’s adherence to the rules. Furthermore, all other federal and state regulations governing Bitcoin must be followed. Compliance with Money Transmitter regulations, Anti-Money Laundering procedures, and Know Your Customer policies are all part of this. Such safeguards may be very costly.

Regulators’ opinions

SEC — Securities and Exchange Commission

In comparison to regulatory authorities in other nations, the Securities and Exchange Commission has been unusually silent on the topic of Bitcoins. They issued an investment notice in 2014, warning consumers that Bitcoin users may be targeted by scammers.

The Securities and Exchange Commission (SEC) recently examined the ‘DAO’ cryptocurrency initial coin offering (ICO), which was hacked and approximately $50 million worth of Ether tokens were stolen. The SEC’s inquiry focused mainly on whether DAO tokens were securities. The study found that putting money into a token in the expectation of a return derived from other people’s management efforts qualifies a cryptocurrency as a security that needs proper regulation.

The SEC’s study, on the other hand, was only focused on Initial Coin Offerings, and Bitcoin goes well beyond that. As a result, any restrictions imposed by the SEC would most likely primarily affect entrants to the market. Although the SEC has determined that any business utilizing Blockchain technology to trade securities must register as an exchange, Alternative Trading System (ATS), or broker/dealer, whether Bitcoin may be regarded as a security depends on the specific transaction.

FinCEN — Financial Crimes Enforcement Network

FinCEN’s cryptocurrency advice describes virtual money as “a medium of exchange that functions as a currency but doesn’t have all the attributes of a real currency.” The advice only applied to convertible virtual currencies like Bitcoin, which may be used as a replacement for real money or have a monetary equivalent.

Under FinCEN rules, ‘users’ of virtual currency are not considered MSBs (Money Serving Businesses). This means that you can use Bitcoins to purchase products or services and are exempted form reporting, registration, and recordkeeping requirements.

Exchangers and administrators, on the other hand, are considered money transmitters and must comply with FinCEN rules. The advice defines ‘exchangers’ as individuals who trade Bitcoins and other digital currencies for a living, while ‘administrators’ are those who bring virtual money into circulation for a living.

FinCEN levied a £110 million penalty on the BTC-e exchange in July 2017, detaining one of its operators and seizing the site’s domain, in its first action against a foreign-located MSB operating in the United States.

Commodity Futures Trading Commission (CFTC)

The Commodity Futures Trading Commission is a federal agency in the United States which regulates financial derivatives. In 2014, a CFTC Commissioner said that the agency had complete control over Bitcoin since it may be classed as a commodity, according to him.

The agency recently published a primer in which they said that, depending on the facts and circumstances, virtual currencies may be classified as commodities or derivatives transactions. As a consequence, Bitcoin’s exchange rate dropped by 8%, as investors anticipated stricter restrictions.

The CFTC seems to be pro-Bitcoin, recently giving LedgerX permission to establish a regulated Bitcoin futures market. The CFTC brought its first-ever accusations against Bitcoin scammers in September 2017. Gelfman Blueprint was accused of fraud, misappropriation and providing false account statements in connection to solicited Bitcoin transactions. This was a well-received charge by real Bitcoin investors.

IRS — Internal Revenue Service

Despite the fact that the IRS issued broad advice on the taxation of digital currencies, numerous issues remain unresolved. The agency added to the confusion by classifying Bitcoin as property, implying that even buying a cup of coffee with the cryptocurrency would result in a tax.

Buying and selling goods and services using Bitcoin is the same as selling an asset, according to IRS rules. If you spend your Bitcoins, you’ve either earned a profit or lost money, based on the exchange rate at the time you purchased and sold them.

To comply with IRS regulations, it is recommended that you keep a log of all transactions involving Bitcoin.

The IRS has increased its search for Bitcoin tax evaders, forming a special team, after just 0.04 percent of consumers mentioned cryptocurrency in their 2017 tax returns. The IRS monitors cryptocurrency transactions closely in an effort to collect more tax revenue. However, there are rumors about a tax amnesty for Bitcoin owners. It remains to be seen whether or not it will really happen, as well as when it will happen.

Federal Reserve

Because it controls the global reserve currency, the US Dollar, the US Federal Reserve is the largest financial institution in the globe. The Federal Reserve is passionate about digital currencies, and the technology behind them. They have written extensive papers on Blockchain and Bitcoin. It speaks volumes about Bitcoin’s increasing popularity that a financial giant like the Federal Reserve spent hours trying to understand the concept.

However, the Federal Reserve has issued warnings repeatedly about the dangers associated with digital currencies. The Federal Reserve recently stated that they are paying close attention to Blockchain and that it ‘could mitigate or exacerbate traditional financial risk’. A US Fed Governor suggested that digital currencies may make it easier to hide illegal activity.

Janet Yellen (the head of the US Federal Reserve) was reported to have stated that the Fed may launch its own digital currency. The United States could enter the cryptocurrency market with its official, state-controlled currency if this happens.

FINRA — Financial Industry Regulatory Authority

The self-regulatory group of US brokers has been active in defining Bitcoin and compiling guidelines.

FINRA also indicated in its report on Distributed Ledger Technology, that widespread use of Blockchain technology could have an impact on a company’s core business operations. Particularly, how FINRA members self-regulate in areas such as anti-money laundering, Know Your Customer rules and asset verification, business continuity, and payments.

OCC — Office of the Controller of the Currency

The US Treasury’s office suggested in a 2016 document that it examine fintech firms’ bids to become special-purpose national banks (SPNBs). This project aims to create a uniform federal regulatory framework for businesses who want to become limited-purpose digital banks. However, there are still major political and legal concerns surrounding this effort as of November 2017.

Furthermore, the OCC published another upbeat document in which it advocated the creation of a department dedicated to “responsible innovation.” They want to open offices in Washington, New York, and San Francisco in order to promote the development of new technologies, such as digital currencies.

CFPB — Customer Financial Protection Bureau

The Bureau has issued a Bitcoin consumer alert. Potential problems include fluctuating currency rates, the probable lack of support from exchanges in the event of lost money, and the danger of hacking and fraud. Aside from that, the CFPB has recognized Bitcoin’s advantages.

NFA — National Futures Association

The NFA is a self-regulatory body for the futures market in the United States. Every futures market participant, including Bitcoin traders, is obliged to be a member of the NFA.

Legislative Development Organizations

The US Senate and House of Representatives, like most other legislative bodies, haven’t been particularly local when it comes to Bitcoin and other digital currencies.

The US Senate addressed letters to different law enforcement agencies in August 2013, inquiring about possible dangers and concerns posed by cryptocurrency. The majority of the authorities replied with a cautious acknowledgement of Bitcoin’s lawful applications.

Since then, cryptocurrencies have been a hot issue in both the Senate and the House of Representatives. The Congressional Blockchain Caucus was established in 2016 with the goal of bringing all members of Congress up to speed on the topic of Bitcoin and Blockchain in order to draft future legislation affecting that industry.

A bill was developed by US legislators in the summer of 2017 to safeguard cryptocurrencies from government intervention. If passed, the law would safeguard some cryptocurrencies that meet certain minimal criteria in order to prevent them from being utilized in illicit business activities. The measure will most likely be introduced in the fall of 2017.

Some Countries Where Bitcoin Is Banned

Bolivia

El Banco Central de Bolivia outright prohibited any money not issued or controlled by the government in 2014. The bank singled out Bitcoin and a few other digital currencies, although the prohibition applies to all cryptocurrencies.

Bolivian authorities recently declared cryptocurrencies to be a pyramid scam and arrested 60 individuals. The move was required, according to an accompanying statement, to remind the public that all forms of digital money are illegal.

Ecuador

Due to the creation of an electronic money system that is state-run, Ecuador has banned Bitcoin and other digital currencies. This initiative is managed by the government and is closely tied to the local currency.

Vietnam

In 2014, the Vietnamese Central Bank released a statement expressly prohibiting citizens from using Bitcoins in the nation. This was done as a preventative step, with the Prime Minister’s decision on digital money to be made later.

According to sources, the Vietnamese Prime Minister approved a proposal in August 2017 that may result in the formal acceptance of Bitcoin and other digital currencies as a method of payment by 2018.

In October 2017, however, the Vietnamese government reversed course and officially prohibited the use of digital money in the nation. It was also stated that anybody found utilizing digital currency would be fined beginning in early 2018.

Bitcoin Is Legal in the Following Countries:

Australia

When Australians buy or spend bitcoin, they are potentially subject to goods-and-services tax. Consumers may end up paying the tax twice: once when they buy the cryptocurrency and again when they use it to buy products and services that are subject to the tax.

The Australian government has just put a legal end to the double taxation of Bitcoin and other digital currencies, in a move aimed at attracting more prospective fintech investments into the nation.

Bulgaria

Instead of Bitcoin being regarded as a commodity like gold, Bulgaria was the first member state of the European Union to recognize it as currency.

Canada

Currently, Bitcoin is classed as an intangible asset. Anti-Money Laundering and Counter-Terrorist Financing legislation are anticipated to control it. This provision has yet to take effect, but when it does, ‘digital currency dealers’ will be regulated as Money Service Businesses.

China

In 2013, the People’s Bank of China (PBOC), banned all financial institutions from accepting Bitcoin-related transactions. This ban included Bitcoin buying and selling, pricing, and even purchasing. Individual Bitcoin trading is allowed in China.

Chinese authorities are enforcing strict controls on cryptocurrency use in China. They have asked that many exchanges stop making withdrawals and present any legal documentation. All Chinese virtual currency exchanges were asked to stop trading by September 2017 in order to comply with the rules.

Chinese authorities also imposed restrictions on cryptocurrency exchanges as well as initial coin offerings (ICOs). Although the restrictions were unusually severe and unorthodox, they were not able to completely eliminate Bitcoin from China. In their latest attempt to increase the effectiveness of the Great Firewall, Chinese authorities will add onshore and offshore platforms that are linked to virtual currencies as well as initial coin offerings (ICOs).

Estonia

Estonia’s Ministry of Finance has ruled that Bitcoin and similar cryptocurrencies are legal as a method of payment. If the buyer is looking to establish a commercial connection, or if he/she purchases more than EUR1,000 per month in cash, traders will need to identify the buyer.

Finland

For tax reasons, the Finnish Tax Administration chose to consider Bitcoin transactions as private contracts, similar to contracts for difference. Any gain in price while purchasing things with Bitcoins or changing BTCs into fiat currency is taxed, but losses are not. Bitcoins that have been mined are considered earned money.

The Finnish Central Board of Taxes has defied EU convention by classifying all services relating to Bitcoin and other comparable digital currencies as financial services, exempting them from VAT.

France

The Ministry of the Economy and Finances of France established rules for financial institutions and users of digital currency in 2014. The rules force Bitcoin distributors to identify and authenticate their consumers, limiting the degree of anonymity. The status of digital currencies for tax reasons must also be defined, since currencies are now subject to capital gains tax. The margin tax was suggested with a €5,000 threshold to enable people to experiment with, invest in, and build businesses using Bitcoin before paying tax.

Germany

Bitcoin is considered private money in Germany. This ruling allows Bitcoin users to continue using the digital currency without intervention from the government, while also allowing authorities to tax the revenues of businesses that utilize it.

Iceland

Transactions with Bitcoins and other digital currencies are restricted, according to a 2014 statement by Iceland’s Central Bank.

The Central Bank established a new set of regulations in 2017, under which broad and general exemptions from previously imposed limitations were allowed.

Israel

As of 2017, Bitcoin is no longer considered money or financial security but a taxable asset. According to the regulation, every time a Bitcoin sells, the seller must pay a 25% capital gains tax. Merchants and miners are companies and must pay corporate income tax as well as a 17 percent VAT.

According to reports, Israel will soon tax Bitcoin and other cryptocurrencies as property. According to recent reports, it will be subject to capital gains tax. This is a 25% rate for individuals and 47% for corporations in Israel. Individual investors won’t have to pay VAT because cryptocurrencies are considered an “intangible asset”. Companies will.

Japan

Bitcoin is only recognized as a legal method of payment in a few countries, including Japan. The tax on Bitcoin trading was abolished in 2017, and Japanese financial regulators began granting licenses to cryptocurrency exchanges.

Jordan Jordan

Banks, exchanges, financial organizations, and payment service businesses are banned from trading in Bitcoin and other digital currencies, according to Jordan’s existing regulations. Although the Central Bank of Jordan and the Jordanian government have issued cautions against utilizing Bitcoins, local companies and merchants continue to accept them.

Mexico

The Mexican Congress is debating measures to regulate the country’s fast-expanding financial technology industry, which includes Bitcoin and other cryptocurrencies. The bill provides a clear set of regulations for fintech firms, with the goal of lowering costs and increasing competition in the industry. It’s also designed to maintain financial stability and combat money laundering and extremist funding.

Slovenia

Bitcoin, according to the Slovenian Ministry of Finance, is neither money nor an asset. The capital gains tax does not apply to Bitcoin transactions, but it does apply to Bitcoin mining and companies that offer products and services in exchange for the digital currency.

Sweden

The Swedish jurisdiction remains as one of the most friendly in the world when it comes to Bitcoin or other digital currencies. The Swedish Financial Supervisory Authority has declared digital currencies such as Bitcoin legal tender.

The Swedish tax authorities also decided to tax Bitcoin mining on the basis of its profitability. Exchanges are the most common type of financial service provider and must apply for licenses.

Bitcoin Is Not Regulated in the Following Countries:

Belgium

Despite the fact that the Minister of Finance said that the government does not need to interfere in the Bitcoin system right now, there have been discussions regarding new laws that would tighten government control over Bitcoin and other cryptocurrencies.

Brazil

The Central Bank of Brazil made a statement on cryptocurrencies in 2014, stating that Bitcoin and other digital currencies would not be regulated. A few years later, the Central Bank President referred to Bitcoin as a pyramid scheme.

China: Hong Kong

Bitcoins are a virtual commodity, according to the Chief Executive of the Hong Kong Monetary Authority (HKMA), who said that the HKMA would not control the cryptocurrency.

According to Hong Kong’s Secretary for Financial Services and Treasury, current laws do not directly control Bitcoins and other comparable digital currencies, but they do offer penalties for illegal actions using such currencies, such as fraud and money laundering.

Colombia

According to Colombia’s Superintendencia Financiera, Bitcoin use is not restricted. The Colombian government still does not approve or legitimize Bitcoin for financial transactions, according to the same regulating body’s most recent statement. However, the nation has no intention of making it illegal as of yet.

Cyprus

The use of Bitcoins or other cryptocurrency is not regulated in Cyprus.

Denmark

The Financial Supervisory Authority of Denmark (FSA), has declared that Bitcoin is not a currency, and it is not regulated.

Greece

There are no laws in Greece that specifically govern Bitcoin or other digital currencies.

India

According to the Reserve Bank of India’s Assistant Governor, the IRB does not support or control Bitcoins. Even though Bitcoin is not prohibited in India, it is expected that it will not become completely legal until an appropriate body is established to oversee all cryptocurrency-related activity.

At the end of 2017, the Indian Ministry of Finance made a comparison between Bitcoin and other cryptocurrency and warned investors about potential dangers.

Indonesia

The Indonesian authorities are yet to clarify and define rules that govern or prohibit the use of Bitcoin.

The Bank of Indonesia has issued a warning to potential investors about selling, buying, and trading cryptocurrency. According to the statement, virtual money is not legal tender in Indonesia.

Lebanon

In 2013, the Bank of Lebanon was the first in the area to issue a Bitcoin warning. Since then, the country’s authorities have taken little to no action in regards to digital currencies. The Governor of the Lebanese Central Bank is the sole noteworthy exception, who has criticized Bitcoin and other digital currencies. He dubbed them “unregulated commodities” and suggested that they be outlawed.

Lithuania

The Central Bank of Lithuania has published a statement alerting the public about the dangers associated with digital currency transactions. Bitcoins are not controlled by Lithuanian or European authorities, according to the general consensus. The potential for restrictions was also addressed in the statement, although no action is expected to be taken.

Malaysia

Malaysia’s Central Bank said in 2014 that Bitcoin was not a legal currency and that it had no plans to regulate it.

Bank Negara, on the other hand, is currently forming its new position on cryptocurrencies. Despite the Malaysian government’s generally favorable stance toward Bitcoin, there is speculation that it may yet be banned. By the end of 2017, a ruling is expected.

New Zealand

Non-banks do not require the Reserve Bank of New Zealand’s permission for activities involving the storage and transfer of Bitcoins and other digital currencies as long as they do not include the issue of real money, according to the bank.

Russia

In 2016, the Russian Federal Tax Service declared Bitcoins “not illegal”. The Russian Central Bank has stated that it is “categorically opposed to” the regulation of digital currency as real money as a payment method for goods and services and as a substitute for currency.

Later, President Putin condemned Bitcoins and demanded the banning of all digital currencies. The Deputy Finance Minister also warned reporters about the dangers posed by cryptocurrencies being banned.

Russian authorities have completely changed their views. Sources claim that Bitcoin will be permitted, but mining will be restricted. The Russian Ministry of Finance stated that cryptocurrency trading will be allowed on official exchanges.

Singapore

The Singapore Monetary Authority (MAS) has previously made declarations of no interference policy as well as a caution to prospective Bitcoin and other digital currency users. A MAS official said in a recent interview that the Central Bank has no intention of regulating cryptocurrencies, but that it would maintain an open mind. He also said that anti-money laundering controls must be implemented as soon as possible.

Singapore’s Inland Revenue Authority has released a set of tax rules for the use of Bitcoin, stating that BTC transactions may be regarded as a barter trade and taxed accordingly. Businesses who deal with Bitcoin exchanges will be taxed depending on the amount of bitcoin they sell.

Thailand

The Bank of Thailand first prohibited people from adopting Bitcoins, warning prospective investors about the dangers. However, it has subsequently changed its position, commissioning cryptocurrency research.

According to a ministerial rule, Thai Bitcoin exchanges need to obtain an e-commerce license from the Thailand Business Development Department. This license allows them to trade digital currency in Thai Baht. Rules are in place to Know Your Customer and Customer Due Dilligence.

The Netherlands

Bitcoin and other digital currencies are not presently covered under the Netherlands’ Financial Supervision Act.

Ukraine

The National Bank of Ukraine recently issued a statement clarifying that the Ukrainian hryvnia is the only currency that may be used lawfully in the nation. The bank also said that the absence of a uniform categorization of Bitcoin around the globe complicates the situation in Ukraine, and that it does not officially endorse any of the classifications established in other countries.

United Kingdom

Bitcoin is presently uncontrolled, according to the UK government, and is exchanged as’ private money ‘for most reasons, including VAT. This implies that when Bitcoin is traded for pounds or other currencies, no VAT is charged. Suppliers of products and services supplied in Bitcoin and other digital currencies, on the other hand, must pay VAT. Capital gains tax applies to digital currency profits and losses.

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